Real Estate Is off the Market’s Radar

03/02/2010 1:00 pm EST

Focus: ETFS

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman and CEO of Schaeffer's Investment Research, finds a key real estate ETF is rallying despite Wall Street's indifference.

According to our latest compilation of data from Zacks Investment Research, the real estate sector has the lowest percentage of analyst Buys (32%) and the highest percentage of Sells (11%) of the 50 or so sectors we track.

And it was with this extremely negative analyst backdrop in mind that I just took another look at what has been a favorite exchange traded fund (ETF) of mine over the past six months—iShares Dow Jones US Real Estate (NYSEArca: IYR).

The first thing I'd note is that IYR has outperformed the Standard & Poor’s 500 Index (SPX) by more than 25% since March 2009. It always grabs my attention when a stock or a sector that is strongly outperforming the SPX is despised by the analyst community, as this means that the favorable price action has been accomplished with little or no analyst support and that further gains could be fueled by analyst upgrades as they begin to capitulate.

Speaking of price action, IYR has been in solidly bullish mode since it broke out above its 200-day moving average in July 2009. Of particular interest to me is the all-time high at $95 set in February 2007. Stocks that decline sharply from their peaks often have difficulty on the way back up at a level equal to half the former high—in this case, at $47.50—and it's no shock to me that IYR's highest close on its rally off the March 2009 bottom has been at $47.43 (on December 28, 2009). While this "half-high" still represents an overhead resistance "speed bump," IYR's upside could be pretty spectacular if it's taken out, as there appears to be little overhead resistance until $55-$60.

Short interest on IYR has climbed steadily, often an indicator of negative sentiment. While these big short positions could represent hedges to long positions in the individual stocks comprising this ETF, I find it interesting that short interest on IYR has steadily grown for many years.

Finally, I'd note that the implied volatility on IYR options is near its lowest levels of the past six months. With implied volatilities now at about 25%, IYR becomes a very interesting "married put trade."

You buy the shares, but simultaneously buy an out-of-the-money put for protection. If the contrarian bullish view proves to be correct (as I believe it will), you stand to make some very nice profits from owning the shares. But if the legions of analysts and media doom and gloomers happen to have it right this time, your put will sharply limit your loss potential for a very reasonable initial cost. (IYR closed Monday at $46.27—Editor.)

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